Just not yet

Why the auc­tion to sell Odesa Port Plant failed

The Ukrainian Week - - ECONOMICS - Lyubomyr Shava­lyuk

The ten­der for the pri­va­ti­za­tion of Odesa Port Plant (OPP) was much-an­tic­i­pated. The prepa­ra­tions took nearly a year. It was sup­posed to be­come the first in a se­ries of large en­ter­prises de­na­tion­al­ized af­ter the Maidan, to pro­vide proof of the new gov­ern­ment's loy­alty to the prin­ci­ples of mar­ket econ­omy, trans­parency and ef­fi­ciency, and to demon­strate to in­ter­na­tional in­vestors that the trans­for­ma­tions tak­ing place in the coun­try are ir­re­versible and are be­ing im­ple­mented steadily. Un­for­tu­nately, this did not hap­pen. When the dead­line for sub­mit­ting the bids ex­pired, it turned out that there were none. The an­swer to why this hap­pened is sim­ple: OPP was not ready for pri­va­ti­za­tion.

First of all, the plant did not have ad­e­quate man­agers. The ar­rest of the head of OPP's Su­per­vi­sory Board Ser­hiy Pereloma and of the First Deputy Chair­man of the Board Mykola Schurikov ac­cused of em­bez­zling its as­sets worth hun­dreds of mil­lions of hryv­nias is a sign that this state-owned com­pany, as in many sim­i­lar cases, has most likely bred too many par­a­sites. Solv­ing this prob­lem, a typ­i­cal one for the coun­try, had to be an in­dis­pens­able part of pre­par­ing OPP for pri­va­ti­za­tion. Ihor Bilous, Head of the State Prop­erty Fund, said that the ar­rest of the plant's man­agers could not dis­rupt the ten­der. How­ever, em­bez­zle­ment means that the com­pany's ac­tual fi­nan­cial per­for­mance is un­der­stated, de­creas­ing its real value and mak­ing the plant less at­trac­tive to in­vestors.

Sec­ond, the prob­lem of the com­pany's debt re­mains un­solved. In mid-2013, en­ti­ties owned by oli­garch Dmytro Fir­tash sup­plied nat­u­ral gas to OPP. This created a debt of $193 mil­lion. This amount is still on the com­pany's books as li­a­bil­i­ties. To­gether with $53 mil­lion in penal­ties for de­lay in pay­ment, this amounts to al­most $250 mil­lion of fi­nan­cial claims, which Fir­tash's en­ti­ties took to the ar­bi­tra­tion in Stockholm.

Another side of the coin which no one dis­cusses is why the OPP didn’t take a sim­ple bank loan to buy the gas back in 2013, in­stead of work­ing di­rectly with the en­ti­ties owned by Fir­tash? The com­pany's fi­nan­cial sit­u­a­tion has al­ways been strong, so get­ting a loan could not be a prob­lem. Why did the plant show sur­pris­ing losses that same year? Why did the net worth of a pow­er­ful plant with a solid list of strate­gic ad­van­tages (in­clud­ing am­mo­nia pipe­line, lo­ca­tion next to the port, and fer­til­iz­ers han­dling ca­pac­ity), which en­sured its con­sis­tent fi­nan­cial sta­bil­ity, fell al­most to zero over just two years? The an­swer to all these ques­tions is quite ob­vi­ous: the plant was de­lib­er­ately be­ing bankrupted and pre­pared for the forced sale to Fir­tash in com­pen­sa­tion for the ar­ti­fi­cially im­posed debt. This scheme was gen­er­ated un­der Yanukovych.

As a re­sult, the com­pany for­mally owes Fir­tash money and cur­rently has nowhere to find it to pay off its debt. The SPFU should have dealt with this sit­u­a­tion be­fore list­ing OPP for pri­va­ti­za­tion. There were sev­eral pos­si­ble so­lu­tions to the prob­lem: sell­ing these li­a­bil­i­ties to other en­ti­ties, so that the state could grad­u­ally deal with them, or tak­ing a loan, for in­stance, from the Sav­ings Bank (such loan ap­peared on the OPP books in 2014, but dis­ap­peared from there last year). None of these op­tions have been im­ple­mented, and the prob­lem re­mained. Ac­cord­ing to rough es­ti­mates, the real value of the plant is now about $250 mil­lion lower than it could be, be­cause the new owner will have to pay off the debts.

Third, there is a much longer information trail also as­so­ci­ated with OPP. It starts with the un­suc­cess­ful at­tempt of sell­ing it in 2009, when Nor­tima LLC con­trolled by oli­garch Ihor Kolo­moisky won the pri­va­ti­za­tion ten­der and was ready to pay UAH 5 bil­lion for the com­pany (over $600 mil­lion at the time). How­ever, the ten­der re­sults were can­celed be­cause, as they say, the then Prime Min­is­ter Ty­moshenko had other plans for it.

At the first glance, back then the state was wrong to adopt an un­prece­dented and a very du­bi­ous de­ci­sion. So, Kolo­moisky has ev­ery rea­son to ex­pect to win in court. The lig­arch is now ex­er­cis­ing information pres­sure on the po­ten­tial in­vestors by stat­ing his firm in­ten­tion to chal­lenge the re­sults of this pre­vi­ous ten­der. It is clear that in­vestors will be re­luc­tant to

buy an as­set that they could lose only be­cause some­one once wanted to buy it. How­ever, one ques­tion re­mains: Why has Kolo­moisky not started the pro­ceed­ings con­cern­ing the can­cel­la­tion of OPP pri­va­ti­za­tion in 2009 to this day? The an­swer seems to be sim­ple. Un­der Yanukovych, he had no chances of win­ning. Af­ter the Maidan, OPP re­ceived a new man­age­ment con­nected to Kolo­moisky, ow­ing in no small mea­sure to then-pre­mier Arseniy Yat­senyuk's ef­forts. It is quite pos­si­ble that the Kolo­moisky man­aged to siphon off part of the com­pany's cash flows with­out any pri­va­ti­za­tion, and had no spe­cial rea­sons to strug­gle to own it of­fi­cially.

Of all the SPFU fail­ures, the start­ing price def­i­nitely wins the gar­land. On May 18, 2016, a Cabi­net meet­ing ap­proved that the state-owned stake of 99.6% OPP shares would be sold at the price start­ing from UAH 13,175 mil­lion, or $523 mil­lion.

In 2009, when OPP was put up for sale, its start­ing price was about $500 mil­lion. A year ear­lier, the com­pany earned a record profit of UAH 797 mil­lion, which then equaled $151 mil­lion. This be­came pos­si­ble thanks to the su­per-high global prices for fer­til­iz­ers, com­bined, how­ever, with the high prices for nat­u­ral gas). If the plant were sold be­fore the cri­sis, then, given this level of prof­its, it could eas­ily be sold for $1 bil­lion, or even for $1.5-1.8 bil­lion. But in 2009, when the cri­sis was in full swing, and the prices for fer­til­iz­ers and nat­u­ral gas de­clined sig­nif­i­cantly, the value of the plant nat­u­rally de­creased. There­fore, the start­ing price de­ter­mined by the SPFU was more or less fair. The sum of over $600 mil­lion that Kolo­moisky was will­ing to pay at that time was slightly lower than the max­i­mum that the gov­ern­ment could ex­pect to re­ceive at that time, but given the global sit­u­a­tion and the lack of buy­ers, the price was rea­son­able (the price was right, but the tim­ing was wrong).

To­day, the price for gas and fer­til­izer is 1.5-2 times lower than the low­est for 2009, and 4 times lower than the high­est for 2008. It is clear that the prof­its earned by OPP in 2008 di­vided by 4 would to­day be the limit of ex­pec­ta­tions, but last year the com­pany did not earn as much (prob­a­bly due to em­bez­zle­ment). How could the start­ing price un­der such con­di­tions be set at the level of 2009, con­sid­er­ing also that seven years ago the plant had no debts, and now it has plenty of them on its books?

Ac­cord­ing to ex­perts, Swiss in­vest­ment bank UBS, which ad­vised the SPFU, rec­om­mended the start­ing price of $300 mil­lion, a fig­ure that is ad­e­quate to the cur­rent sit­u­a­tion and which, in case of a real com­pe­ti­tion among the buy­ers, could in­crease quite no­tice­ably in the bid­ding process. But even­tu­ally ei­ther the Fund or the Gov­ern­ment de­cided for some rea­son to heed the ad­vice of some "in­de­pen­dent ap­prais­ers."

The Ukrainian Week al­ready wrote that the en­ter­prises still re­main­ing in state own­er­ship (see Is­sue #7 at ukraini­an­week.com) have nu­mer­ous un­solved prob­lems and dif­fi­cul­ties in man­age­ment. No one is in a hurry to clean this all up, for­get about any sys­tem­atic work. OPP is not an ex­cep­tion. Its prob­lems are fur­ther ag­gra­vated by the lack of the guar­an­tees of un­in­ter­rupted gas sup­ply (which was men­tioned as if un­in­ten­tion­ally in his com­ments by the man­ag­ing direc­tor of Fir­tash's Group DF Boris Kras­nyan­sky, as well as by Bilous). Re­cently, Ukr­transgaz an­nounced its in- ten­tion to turn off gas sup­plies to the plant, but then the prob­lem was allegedly solved. But this is again a typ­i­cal ex­am­ple for Ukraine, when the oli­garchs, act­ing through of­fi­cials con­trolled by them, use in­fra­struc­ture to pull the plug on other busi­nesses that they don't like. The own­ers of ArcelorMit­tal Kryvyi Rih (for­mer Kryvorizh­stal) who have been work­ing in Ukraine for 10 years now can cite nu­mer­ous ev­ery­day ex­am­ples: ev­ery now and then Ukrainian Rail­ways would run short of cars to trans­port their prod­ucts, or have some prob­lems with rail­road tracks, or some dif­fi­cul­ties in ports would arise.

Such su­per­fi­cial­ity of the Ukrainian of­fi­cials has re­peat­edly nega­tively af­fected the en­tire coun­try. How­ever, this is not an iso­lated prob­lem. At the other ex­treme, it has another huge flaw: lit­er­al­ism and ex­ces­sive and un­be­liev­able num­ber of for­mal­i­ties. The deep un­der­stand­ing and thor­ough study of each is­sue takes time.


The third flaw is the in­ad­e­quate per­cep­tion of the sit­u­a­tion. We can as­sume that the start­ing price of $523 mil­lion is a po­lit­i­cal de­ci­sion mo­ti­vated by the ac­tive co­op­er­a­tion with the West and the hopes that the very fact of this in­ter­ac­tion would help find in­vestors. But for nearly a year now, Ukraine has been un­able to re­sume its co­op­er­a­tion with the IMF, although the de­mands of the lat­ter are very spe­cific, and the ac­tion plan is in­cred­i­bly de­tailed. For­eign in­vestors look at the sit­u­a­tion more re­al­is­ti­cally. Mean­while, no coun­try's of­fi­cials showed such ad­e­quate per­cep­tion of the sit­u­a­tion, at least not in the pub­lic information space, un­til the fail­ure of the OPP pri­va­ti­za­tion ten­der.

Sum­ma­riz­ing the above, Ukraine’s of­fi­cials should talk (or prom­ise) less, curb their ap­petites and start work­ing more ef­fi­ciently, in­stead of giv­ing the ap­pear­ance of work­ing. Then, prob­a­bly, the fourth flaw — lack of com­mu­ni­ca­tion — could be with­drawn from the agenda. Why the lack of bids for the OPP pri­va­ti­za­tion ten­der was a dis­ap­point­ment to many? Be­cause the ex­pec­ta­tions, even those of the in­sid­ers, were ex­ag­ger­ated, while the out­siders be­lieved the tall tales that they were be­ing told.

In sum­mary, in or­der to over­come the chronic prob­lems of the state ma­chine lead­ing to fail­ures such as the OPP pri­va­ti­za­tion, peo­ple who have the will for that would have to deal with the law, with cor­rupt of­fi­cials, with the poor cul­ture of the civil ser­vice, with the oli­garchs and their money and, even­tu­ally, with time. Is this an ad­e­quate task? In gen­eral, yes. But not to­day, be­cause the align­ment of forces in the so­ci­ety does not en­cour­age change (for the lack of in­tel­lect, en­ergy, and the peo­ple as­pir­ing to make a dif­fer­ence). The sit­u­a­tion with the OPP pri­va­ti­za­tion once again proves that the oli­garchs are too strong, the state is too weak, and the of­fi­cials are too in­ad­e­quate.

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